SMEs to increasingly lean on smaller lenders

Small businesses will be increasingly turning to smaller or specialist lenders in the aftermath of the Hayne royal commission, a recent study has found.

Smaller and specialist lenders are expected to continue gaining market share as small businesses, like consumers, increasingly turn to them following fallout from the financial services royal commission, according to 50 per cent of the respondents to a finder.com.au RBA survey.

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Other studies paint a similar picture, such as Scottish Pacific’s latest SME Growth Index, which showed that small businesses are warming up to non-bank lenders as obtaining finance from the big four banks becomes more difficult or less attractive.

While 10 per cent of respondents to the finder.com.au survey feel that the royal commission will have no impact on small businesses, the vast majority, or 80 per cent, believe that such businesses will have greater difficulty accessing credit, while 25 per cent are even less optimistic, expecting the limited access to funds to result in more small businesses shutting up shop.

Research from Ernst & Young’s annual Growth Barometer had also revealed that almost a quarter (24 per cent) of Australian businesses consider reduced access to credit the greatest external risk to growth, up from 6 per cent in 2017, and 8 per cent higher than respondents from the rest of the world (16 per cent).

Moreover, 15 per cent of finder.com.au’s respondents believe founders will struggle to get their businesses off the ground as they would not be able to invest in innovation, while one in four predicted a fall in hiring rates next year as a consequence of insufficient access to credit exacerbated by the royal commission.

On the other hand, Graham Cooke, insights manager at finder.com.au, said that the increased scrutiny on larger institutions means now is the time for smaller lenders to come to the fore.

“There is a big opportunity here for smaller lenders to gain an edge over the big banks due to the increasingly competitive market.”

Similarly, speaking at the COBA 2018 Convention in Melbourne this week, the former chair of the Australian Competition and Consumer Commission, Professor Graeme Samuel, said that the litany of abuses exposed through the royal commission present an opportunity for the customer-owned banking sector, noting that the sector “has different drivers, and thus a different foundation on which to base their culture” than the major banks.

“If they take advantage of the opprobrium currently attached to the major banks, and structure their conduct around the ‘should we do it’ culture, they have a lot to gain from current events,” Mr Samuel said.

“They have the flexibility and motivation to not just talk about placing the customer first, but to actually walk the walk.”

Mortgage marketplace HashChing also recently noted the shift away from banks and towards non-bank lenders as a result of tighter lending standards prompted by numerous investigations into the financial services industry.

This is additionally supported by recent ANZ Bank data, which showed that new mortgage issuance by non-bank lenders has risen by approximately 13 per cent over the year in the 2017–18 financial year, compared to 4.8 per cent growth for banks, taking the non-banks’ share of total housing debt from 6.6 per cent to 7.7 per cent.

ANZ economists Daniel Gradwell and Shaurya Mishra described the increase as a net positive, speculating that non-bank lenders “are making the most of their position outside of APRA’s regulatory net”.

Four separate analysis pieces from each of the “big four” accountancy and business consultancy firms — Deloitte, EY, KPMG and PwC — have noted that competition from non-major banks and non-bank lenders was having a marked impact on the big four banks’ market share and growth.

One firm even stated that “if non-banks continue to grow at this rate, regulators will need to keep a close eye on the implications for the system”.

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